Worst Decade Ever

Floyd Norris notes that the decade through January was the worst decade ever for the stock market after adjusting for inflation:

NYT: Over the 10 years through January, an investor holding the stocks in the S.& P.’s 500-stock index, and reinvesting the dividends, would have lost about 5.1 percent a year after adjusting for inflation...

Until now, the worst 10-year period, by that measure, was the period that ended September 1974, with a compound annual decline of 4.3 percent...

For the current period, the total return was negative, at minus 2.6 percent a year, even before factoring in inflation.

But what about after the Great Crash? Wasn't that decade horrendous?

Perhaps surprisingly, the 10 years after the 1929 crash were not that bad by this measure... The deflation of the 1930s helped the after-inflation of the stock market to look better.

For the 10 years after the crash, through Sept. 30, 1939, the compound annual decline of the stock market, with dividends reinvested, was 5 percent a year before considering inflation. That remains the worst 10-year period. But after factoring in deflation, the loss was 2.8 percent a year, which is still bad but not horrid.

Compounding interest rates over a 10-year period can magnify differences that look small. For example, over the 10 years through January, the total losses in nominal dollars from the S.& P. 500, with dividends reinvested, was 23.5 percent. But with inflation added in, the decline was 40.4 percent.

The good news: This performance was, to some extent, predictable. By the two valuation measures that have been shown to have predictive value (Tobin's Q and Cyclically Adjusted PE), the S&P was wildly overvalued in 1999.

By the same measures, the S&P 500 is now mildly undervalued. So the next decade should be far better.